The global supply chain is a complex web of interconnected systems and processes that involve numerous stakeholders. While this vast network has enabled the movement of goods and products worldwide, it is not without its challenges. Several issues can impact the supply chain’s efficiency and transparency, from fake goods to opaque processes. But, blockchain technology has emerged as a potential solution to these challenges. By providing a transparent, secure, and tamper-proof record of transactions, blockchain can transform how we manage supply chains. This article will act as a guide on how blockchain can change supply chain management.
What is Supply Chain Management?
Supply Chain Management (SCM) is the process of managing the flow of goods and services from the initial stage of production to the final delivery of the product to the end customer.
SCM coordinates and manages activities involved in procuring, producing, storing, and distributing goods and services.
Suppose you have ordered a pizza for delivery.
The restaurant sources suitable raw materials beforehand to manage food orders. Using those ingredients, the pizza is made by a chef in the restaurant. The pizza is then placed in a box and handed to a delivery person who transports it to your location.
Now, we will take this pizza example and look into the overall cost breakdown from a supply chain perspective. Of course, the cost of a pizza can vary depending on the size, toppings, and location. Thus, we will use a ‘large-size pepperoni pizza’ as an example.
1. Ingredients and Labor
- Cost: $6.00
- This includes the cost of dough, cheese, sauce, toppings, and labor to prepare the pizza.
2. Overhead
- Cost: $2.00
- This includes the cost of rent, utilities, and other fixed expenses associated with running a restaurant.
3. Distribution
- Cost: $1.50
- This includes the cost of delivering the pizza to the customer’s location. It refers to fuel, labor, and vehicle maintenance charges.
4. Profit Margin
- Cost: $4.00
- This is the profit margin for the restaurant. It is typically around 20-30% of the total cost of the pizza.
A well-designed and efficient supply chain can lead to significant cost savings, increased efficiency, and better customer satisfaction. For instance, in 2021, Apple reported saving $1.5 billion in inventory costs through supply chain automation and optimization techniques.
SCM is critical for businesses to operate efficiently and meet customer demand. By managing the flow of goods and services from production to delivery, companies can ensure the following,
- Delivery of products on time to the customer.
- Maintain the correct cost for both producer and end consumer while maintaining quality standards.
What Is Blockchain Technology?
Blockchain is a decentralized digital ledger system.
Blockchain enables secure and transparent transactions between multiple parties without intermediaries. It acts as a distributed database that records transactions in a safe and tamper-proof way.
Imagine a group of people playing a game of cards.
Instead of each person keeping their score, they use a ledger that everyone can see and update. The transaction is recorded in the ledger for everyone to see whenever a player wins or loses. This way, no one can tamper with the data, making the game more transparent and secure.
You might think about how exactly Blockchain ensures security.
Blockchain uses ‘cryptography’ to ensure that transactions are secure and no one can alter it. Each transaction is validated by a network of computers known as ‘nodes’ before it is added to the blockchain network. Once a transaction is added, it becomes a permanent and unalterable record.
One of the most well-known examples is ‘Bitcoin.’ Bitcoin is a digital currency that operates on a blockchain network. Each Bitcoin transaction is recorded on the blockchain, making it transparent and secure.
How Can Blockchain Transform Supply Chain Management?
1. Supply Chain Visibility and Traceability
One grave problem with today’s supply chain is the lack of visibility and traceability.
Luckily, blockchain can help increase both of them across the supply chain.
With a blockchain system, organizations can track the movement of their products from raw material sourcing to the store shelf. They record each step in the process on the blockchain.
For example, in 2018, the Centers for Disease Control and Prevention (CDC), a US national public health agency, warned about an E. coli outbreak linked to romaine lettuce.
By the time the US government figured out the source of the E. coli contamination, many more people fell sick. Using blockchain, they could have quickly identified and removed the affected batches from the supply chain, protecting public health.
2. Smart Contracts
Smart contracts are self-executing contracts that automatically execute when certain conditions are met. They are a crucial feature of blockchain that can be used to automate and simplify complex supply chain processes.
Imagine a company that wants to purchase raw materials from a supplier.
Instead of using a traditional contract that requires manual verification and approval, they can use a smart contract. Smart contracts automatically verify and approve the transaction once the conditions are met.
For instance, the smart contract could be programmed only to release payment once the raw materials are delivered.
Smart contracts can also be used to track the flow of goods. A smart contract could be created that automatically updates the blockchain with the shipment statuses. Based on the status, it could be programmed to trigger specific actions, such as notifying the recipient.
3. Decentralization
Traditionally, SCM has relied on centralized systems, where a single entity, such as a manufacturer or distributor, controls the information flow. This can lead to inefficiencies, delays, and a lack of transparency.
Blockchain offers a decentralized alternative to this approach. Using a distributed ledger, each party in the supply chain can have visibility and control over their transactions without needing a central authority.
For example, a farmer can record the production and quality of their crops on a blockchain. It can then be accessed by distributors, retailers, and consumers. This can help ensure the products are authentic, safe, and have not been tampered with during transportation.
4. Data Privacy and Security
Another critical benefit of blockchain is that it enables secure data sharing between multiple parties without intermediaries. Companies can collaborate more quickly and efficiently while maintaining control over their data.
Also, from a data privacy perspective, blockchain can protect sensitive information using encryption and access controls to authorized parties only.
Let’s take the healthcare industry as an example. Blockchain can help prevent data breaches and ensure only authorized healthcare providers access patient records.
Real-world Examples of Blockchain in Supply Chain Management
There are several real-world examples of blockchain being used in SCM.
1. IBM Food Trust
IBM Food Trust is a blockchain-based platform that enables food companies to track the movement of food products from farm to store.
The platform has been adopted by several major food companies, including Walmart, Nestle, and Unilever, to improve food safety and traceability.
2. Maersk and IBM TradeLens
Maersk and IBM have collaborated to create TradeLens, a blockchain-based platform for the global shipping industry.
The platform enables shipping companies, ports, and customs officials to share real-time data, improving supply chain efficiency.
3. Everledger
Everledger is a blockchain-based platform that tracks and authenticates high-value assets like art and fine wine.
The platform helps to create a secure and transparent record of the ownership, authenticity, and movement of these assets. It ensures ethical sourcing and reduces the risk of counterfeit products.
4. De Beers
De Beers, the world’s largest diamond producer, has launched a blockchain-based platform called Tracr.
It enables the tracking and verification of diamond supply chains. The platform has been adopted by several major diamond companies, including Alrosa and Chow Tai Fook. It helps to improve transparency and combat the sale of conflict diamonds.
Benefits and Challenges of Using Blockchain in Supply Chain Management
Blockchain technology has the potential to bring several improvements to SCM. But there are also some issues to be addressed.
Here are some benefits and challenges of using blockchain in SCM.
Benefits
1. Increased Transparency
Blockchain can provide a transparent and tamper-proof record of all transactions in the supply chain. It offers the stakeholders greater visibility into the movement of goods.
2. Improved Efficiency
By using blockchain to automate supply chain processes, companies can reduce the time and costs associated with manual processes, such as paperwork and data entry.
3. Enhanced Traceability
Blockchain can make it easier to trace the origin of materials and detect any anomalies in the supply chain.
4. Better Data Privacy
Blockchain can help to maintain data privacy. It uses encryption and also restricts data access to authorized parties only.
5. High Security
Blockchain can provide secure storage of sensitive information, protecting against data breaches.
Challenges
1. Integration with Existing Systems
One of the biggest challenges of implementing blockchain is integrating it with existing supply chain systems. It can be complex and time-consuming.
2. Scalability
As transactions on a blockchain network increase, maintaining performance and scalability can become challenging. It can limit its effectiveness in large-scale supply chains.
3. Cost
Implementing blockchain in the supply chain can be expensive, particularly in the short term, due to the need for specialized hardware and software.
4. Regulatory Issues
There may be regulatory issues around the use of blockchain in SCM. It is particularly true in heavily regulated industries, such as pharmaceuticals and food safety.
Future of Blockchain in Supply Chain Management
The use of blockchain technology in SCM has gained significant momentum in recent years.
As per the MarketsandMarkets report, the global Blockchain Supply Chain market is expected to grow at an impressive CAGR of 53.2%. It claims the market can reach a staggering USD 3.3 Billion by 2026, up from USD 253 million (2020).
This growth is driven by the rising demand for enhanced supply chain transparency and security. Also, as blockchain demonstrates its potential, we expect to see even greater adoption in the years ahead.
Pharma, Food, Fashion, Logistics, and Shipping are potential industries where blockchain will play a vital role in the future.
Conclusion
Blockchain can transform supply chain management by providing greater transparency, traceability, and security.
By leveraging blockchain, stakeholders can track the movement of goods in real time. This can help prevent the sale of counterfeit goods, improve efficiency, reduce costs, and increase trust between stakeholders in the supply chain.
Of course, there are some challenges to implementing blockchains. But the benefits of adopting this technology are significant.
FAQs
1. What is supply chain management?
Supply Chain Management (SCM) is the process of managing the flow of goods and services from the initial stage of production to the final delivery of the product to the customer.
SCM coordinates and manages activities involved in procuring, producing, storing, and distributing goods and services.
2. What is blockchain technology?
Blockchain is a decentralized digital ledger system.
Blockchain enables secure and transparent transactions between multiple parties without intermediaries. It acts as a distributed database that records transactions in a safe and tamper-proof way.
Blockchain uses ‘cryptography’ to ensure that transactions are secure and cannot be altered. Each transaction is validated by a network of computers known as ‘nodes’ before being added to the blockchain. Once a transaction is added to the blockchain, it becomes a permanent and unalterable record.
3. How can blockchain improve supply chain management?
Blockchain can improve SCM through increased transparency, efficiency, traceability, data privacy, and security.
By providing a tamper-proof record of all transactions, blockchain can offer stakeholders greater visibility into the movement of goods.
Also, secure storage of sensitive information on the blockchain can protect against data breaches.
4. What are smart contracts?
Smart contracts are self-executing contracts that automatically execute when certain conditions are met. They are a crucial feature of blockchain technology that can be used to automate and simplify complex supply chain processes.
For instance, the smart contract could be programmed only to release payment once the raw materials are delivered.
5. How can blockchain ensure data privacy in supply chain management?
Blockchain can help to maintain data privacy. It uses encryption and also restricts data access to authorized parties only.
Healthcare is a perfect example. Blockchain can help ensure that only authorized healthcare providers access patient records.
